T&D Holdings, Inc. (8795) Earnings Call Transcript & Summary

I am Moriyama of T&D Holdings. Thank you for attending our conference call today. As disclosed previously on February 14, we expect to achieve our target of JPY 130 billion in group adjusted profit for the final year of the current group long-term vision in the current fiscal year or FY 2024, 1 year ahead of schedule. Today, in light of this achievement I would like to explain the future direction of the group, focusing on future profit forecast and capital policies. There are 4 points to be discussed today. The first is that share buyback for fiscal year ending March 31, 2025, is set to be the largest ever at JPY 100 billion. The total shareholder return amount, including cash dividend, will be JPY 141.6 billion. The second is that we are shifting to a policy where profit growth more directly translates into higher cash dividends from the dividend payment for FY March '26. Specifically, we will implement a cash dividend with a payout ratio of 60% based on the 5-year average of group adjusted profit and from the dividend payment for FY March '26. The dividend forecast per share for the fiscal year ending March 2026 is JPY 120, a significant increase from JPY 80 for the current fiscal year. The third is that group adjusted profit forecast for the fiscal year ending March '26 is approximately JPY 140 billion. The fourth and final point is that we aim for group adjusted profit of JPY 200 billion or more, and adjusted EPS of JPY 400 or more for the fiscal year March 2031. Next, I'd like to review the current group long-term vision. Please turn to Page 3. In the current long-term vision, we have been promoting both economic value-based and financial accounting-based management, working to accumulate value of new business and increase EV as well as improving financial accounting KPI, which had been sluggish compared to the economic value-based figures. Profits grew steadily in the core domestic life insurance business, as a result of steady increase in policies in force and rising interest rates. As explained on the previous page, we expect to achieve our target of JPY 130 billion in group adjusted profit 1 year ahead of schedule. In addition to achieving group adjusted profit ahead of schedule, adjusted ROE improves by reducing investment risk and strengthening shareholder returns. We expect adjusted ROE for the fiscal year ending March '25 to be 9%, exceeding the cost of shareholders' equity. In addition to steady growth in our core business, we have also promoted the diversification of earnings sources by investing in the closed book business. As disclosed on March 21, we've decided to invest into Viridium, a German life insurance holding company. Based on the achievement of financial KPI targets ahead of schedule and the decision to invest in the European closed book business, today, we decided to implement a share buyback of JPY 100 billion, the largest ever, for the fiscal year ending March 2025. Reflecting the share buyback and JPY 120 billion investment in the European closed book business, ESR is expected to be approximately 225%. Please turn to Page 4. As disclosed on March 21, the outline of the investment into Viridium in Germany is as shown. We aim to contribute to group consolidated profits, both in terms of diversification of earnings sources and profit growth by establishing a portfolio of closed book business that is diversified in both geography and business model, along with Fortitude. Please turn to Page 5. I will explain the future profit forecast. We will continue to aim for steady growth in core domestic life insurance business and further profit growth through profit accumulation in the closed book business of both Fortitude and Viridium. We expect group adjusted profit of approximately JPY 140 billion and adjusted ROE of approximately 10% for the fiscal year ending March 31, 2026. Furthermore, for the fiscal year ending March 31, 2031, the final year of the next Group Long-Term Vision, we aim for group adjusted profit of JPY 200 billion and adjusted EPS of JPY 400 or more. Based on these forecasts, we will shift to our dividend policy to a payout ratio of 60% based on the 5-year average of group adjusted profit where profit growth more directly translates into higher cash dividends. Please turn to Page 6. EV and the value of in-force business of the group have been steadily increasing due to the accumulation of value and new business resulting from solid sales in the domestic life insurance business and rising interest rates. We believe this is a major strength of the group and the value of in-force business will support future performance. Additionally, EV reflects interest rate increases instantaneously, whereas in financial accounting, interest rate increases gradually contribute to profit growth. The image of increase in positive spread is shown in the table. Positive spread is expected to expand due to continuous improvement of investment portfolio and decline in assumed investment yield in addition to the rise in interest rates. Please turn to Page 7. This slide shows shareholder return policies. Returns from periodic profit will be all cash dividends. And as explained on Pages 2 and 5, we will implement a cash dividend with a payout ratio of 60% based on the 5-year average of group adjusted profit. Additionally, we are committed not to cut dividends in principle. Regarding additional returns based on capital levels, there is no major change from the previous policy. However, given that the interest rate sensitivity of ESR has decreased due to the introduction of mass surrender risk and the promotion of cash flow matching for assets and liabilities, impact of temporary interest rate increases will be deleted from the items to be considered in the additional returns. Please turn to Page 8. The capital allocation for the full year period from April 2021 to March 2025 is shown on the left. Including cash dividends and share buyback, returns exceed group adjusted profits and the total payout ratio is expected to be 109%. In addition, we have made a gross investment of JPY 188 billion over 4 years, mainly through additional investment in the closed book business. Our approach to future capital allocation is described on the right. We will make a steady return, 60% of the 5-year average of group adjusted profit as a cash dividend, while promoting a disciplined capital policy and further improving capital efficiency through growth investments and share buyback. Please turn to Page 9. Due to dividend payout ratio of 60%, cash dividends are expected to be significantly rounded up from the current level as group adjusted profits grow. Although it is impossible to mention specific future cash dividend levels at this time, we believe that the shift in dividend policy will greatly enhance the predictability of cash dividends. Please turn to Page 10. We are currently formulating the next Group Long-Term Vision, which is set to begin in FY 2026. In the next Group Long-Term Vision, we aim to realize corporate value enhancement and improve our stock price by leveraging the collective strengths of the group, focusing on growth strategies through new investment opportunities and promotion of integrated group management. This concludes the explanation. Thank you very much for your kind attention.

We would now like to begin the Q&A session. Aside from President Moriyama, depending on the questions, Director, Senior Managing Executive Officer, Nagai; or T&D United Capital, President, Isobe, may answer your questions. We'd like to start the Q&A session. The first question is from Mr. Muraki, SMBC Nikko.

This is Muraki from SMBC Nikko. I have 2 questions. First of all, thank you very much for increasing the shareholder return level significantly. My first question is regarding the Viridium deal. I believe that this investment would have a significant impact on our ESR level. So what is the magnitude of that impact? I would also like to understand the background of how you came across this opportunity because I believe Allianz was leading this process. So when did they approach you? And when did you start considering this opportunity? And regarding the investment stake, I think your stake will be the largest. So to the extent possible, can you share with us why you came to own the largest portion in this consortium?

Yes. This is Isobe from T&D United Capital. Mr. Muraki, thank you for your question. So regarding your first question regarding the investment into Viridium and the impact to the group ESR, at this point, the final investment amount has not been finalized yet. So at this point, I cannot specify how much impact this will have on our ESR. But assuming that our investment is roughly JPY 120 billion, the denominator of the ESR, the risk amount, will increase. So with that, the group ESR is likely to go down by 10 percentage points. And regarding your second question about the background of how we came across this opportunity and how we started to consider this consortium? Like you pointed out, this consortium is led by the local insurance company, Allianz. In the meantime, T&D has been working with Allianz to set up this consortium. So from the early stage of this process, we had been closely coordinating with Allianz to consider this opportunity. So that is the background. So that said -- and regarding the investors' respective stake, I would like to refrain from responding to that question. But our ownership will be 29.9%. And this was listening to the request coming from the joint investors within the consortium and based on the discussion, we came to this conclusion. I believe that the requirement for this deal is that no one owner will consolidate the joint venture into the books. So that's why Allianz were not able to do this on a stand-alone basis and they were looking for a partner.

So did they directly approach you or did this come to you from investment banks?

Yes. So Isobe will continue to respond to your question.

So we have been working to pursue opportunities that would fit our investment strategy in many different ways. And through that process, we have built an extensive personal network and also network of information. So that's how we came across this opportunity. So Allianz approached us, and this was not referred to us by investment banks.

I see. My second question is regarding the graph on the right-hand side on Page 8. So right now, you don't have anything in the pipeline with this investment. Is that the correct understanding? So I guess within the realm of the next midterm business plan, going forward, what kind of investment opportunities we will be interested in about the region or what kind of lines of business?

Yes. I, Isobe, will continue to answer that question. In the current long-term vision, we have positioned closed book of business domain to be a pillar of our business, and we were intending to build the next business pillar after Fortitude. So with this investment into Viridium, this objective is achieved to a certain extent. So looking forward, as we build the next long-term vision, we will consider how we can continue to achieve profit growth and how we can improve the enterprise value to decide on the policy of which domain to invest in. At this point, we have not decided on any specific business domain to invest.

We'd like to move on to the next question. Bank of America Securities, Tsujino-san, please.

This is Tsujino from BofA Securities. I have 2 questions. First question relates to for the fiscal year ending March 2031, group adjusted profit of JPY 200 billion or more, that is the statement you have made. So as we consider this, how do you take into account the contribution from Viridium? The transaction itself has not been closed. So do you have visibility of the profit? And do you expect them to grow? And do you incorporate these factors into that group adjusted profit? Or perhaps it is not included, that is why you put that as the minimum level. So that is the first question. The second question relates to additional returns. So as you have already described in Page 7, so when ESR consistently exceeds 225%, you will consider additional returns. But I believe if you look at Daido Life, I believe there is room to further lower and reduce the interest rate risk, given the fact that the super long-term interest rate has reached the current level. And even if the policy rate were to rise, you may just wait for the super long-term rate to go up. And if you do not expect that to happen, perhaps we are at this timing to close the interest rate gap. If that is the case, ESR may rise. So do you intend to conduct these measures? Do you believe we have reached that timing? If that is the case, will you consider additional buybacks? So I'd like to hear your current thoughts on this policy. That is all.

Tsujino-san, thank you very much. This is Nagai, and I would like to answer your question. So first of all, the group adjusted profit of JPY 200 billion or more, to be honest with you, this is still a rough figure. So we cannot give you a clear indication of the breakdown. But in terms of Viridium, the contribution of the revenue and also some of the earnings from the gross investment, we do take that into account to a certain degree. In addition to that, we have a conservative view as we look at the JPY 200 billion. Second point, in terms of the interest rate risk reduction, so investment decisions based on interest rate outlook would not be conducted, that is our basic policy. However, given the current interest rate level, it has been on the rise. Based on that, we will continuously progress ALM to reduce the interest rate risk. So we have been raising the interest rate matching ratio. And especially in terms of cash flow matching at Daido Life, we will continuously engage in this policy. So based on all these measures, we will be able to reduce the interest rate risk then -- in comparison to the current level. Also within the portfolio, we will reduce equities and other assets and hope to further accumulate these ALM assets. By doing so, the positive spread should be steadily increasing. Of course, it's partly helped by the reduction in the assumed investment yield. But we do believe this will be part of the important pillars for the growth drivers. Also with progressing with ALM, we should be able to achieve the liability cost. So that is the current plan. If we have any more detailed plans, once it is ready, we would like to explain those to you in a different occasion.

So to a certain degree then, you have incorporated that within that -- the guidance. And the interest rate risk will continuously decline. If that is the case, ESR may rise, and there could be some buybacks. However, within the same page that you mentioned JPY 200 billion, you also have the indication for EPS. If you look at the EPS, it does not appear as if you will be conducting buybacks. But based on the rule you've mentioned, there is a possibility that buybacks could be conducted. Is my understanding correct?

Thank you for that comment. In terms of the additional returns, as mentioned already, no change in terms of our policy. So we will look at the state of capital and also look at the probability of growth investment. So accordingly, we would like to make the decision.

We'd like to move on to the next question. The next question is from Mr. Watanabe from Daiwa Securities.

Yes. This is Watanabe from Daiwa Securities. I have 2 questions. First, I want to confirm your thinking behind adjusting your capital level for FY '25. After the buyback and investment, your ESR will be around 225% near the upper level of your range. So can we still expect 100% total shareholder return? [indiscernible] profit for next year is going to be JPY 100 billion, deducting dividend of JPY 60 billion, the remaining will be JPY 40 billion. So would that be the fund available for share buyback, but the actual adjusted profit will be JPY 140 billion. So the JPY 80 billion will be the fund available for investment and share buybacks. And my second question is regarding the profit contribution from Viridium. For FY '25, the adjusted profit is expected to be JPY 140 billion. So how much is the profit contribution coming from Viridium? And looking at the 6 major insurance companies in Japan, we are the only one who reflect the burden of the goodwill on adjusted profit. Would you be exploring that in the future?

Yes. Thank you for your question. This is Moriyama. I will take your question. First, regarding the additional shareholder return for FY '25. At this point, I cannot mention anything concrete, but we will be looking at the capital level and also the growth investment. And subject to that, we would like to consider additional shareholder return. And at this time, we have been able to increase the visibility over the cash dividend. On the other hand, we also feel that it's necessary for us to build up the expectation for future growth as much as possible. So in that sense, we will be looking at the balance between growth investment and the capital level to consider the additional shareholder return. And with the JPY 100 billion in share buyback this time, as you can see from that announcement; from the past, we have been communicating to the market that we see this as a challenge that needs to be addressed. Also since last year, at the holding level, we have been discussing this topic in regards to how we can increase the corporate value. So that's why we decided on the share buyback of JPY 100 billion. From that perspective, we will continue to discuss further. But for next fiscal year, as I said, we will be looking at that level and also the balance with the growth investment to consider additional shareholder return.

For the second question, I, Nagai, will respond to that. The JPY 140 billion guidance for the adjusted profit for next fiscal year does not reflect any contribution from Viridium. Before closing the deal, it will take some time. So in our plan, we expect the contribution to kick in from FY '26. And regarding the goodwill, to date, our group did not have any huge goodwill amount. So we did not include a formula for goodwill in the adjusted profit. So we will be looking at how much goodwill we will be booking with this investment into Viridium. We are now calculating the market value for assets and liability. And depending on the result of that, we may have negative or positive goodwill. But depending on the amount of the goodwill, we will consider if that should be reflected into the adjusted profit.

We'd like to move on to the next question. JPMorgan Securities, Sato-san, please.

I have 2 questions. First question is addressed to the President and CEO, Moriyama-san. So as of the fiscal year ending March 2031, group adjusted profit of JPY 200 billion, I'd like to hear your thoughts. So you've mentioned JPY 200 billion or more, so you're alluding to the fact that it could be higher. And if my memory serves me correct, I believe Moriyama-san's aspiration was to reach double-digit annualized growth. I believe you have made that comment in the past. But if we look at the number, the average growth is a single-digit growth. So how do you explain this gap? How do you see the gap in comparison to your previous comment? That is the first question I'd like to confirm. The second question, apologies for being persistent. This is related to your thoughts on additional returns. Again, in the previous communication, you have mentioned that you do not intend to see a decline in the shareholders' return. So that was the expectation. In fact, this time around, the cash dividend, there has been a significant rise. But if you look at the total shareholders' return, TSR, the track record has been between 80% to 100% or even higher 100%. So perhaps it is difficult to commit on a single-year basis. But do you have any specific image of average TSR? I would also like to comment and confirm on those points as well.

Thank you very much for that question. As for the fiscal year ending March 2031 in terms of the profit growth, so previously, I've explained, we could discuss within the group possibilities of growing the profit around 10% per annum-or-so. So that was not a commitment to 10%, but it was an attempt to explore whether we can achieve that number, what are some of the pieces necessary? So we were just trying to describe our attitude towards that. Now this time around JPY 200 billion and more that is, of course, we need to finalize and look into the details going forward. So that is why we have mentioned this general line of JPY 200 billion. And as mentioned already, in terms of the domestic life insurance business, so we have been conducting the asset portfolio replacement and also given the interest rate rise, so the positive spread will definitely be the growth driver. And of course, the growth investment related to Viridium, that would be positive. So again, we'd like to give that additional push above that line, I've just mentioned. In terms of the additional returns, basically, we have no intention of reducing that. So how do we intend to gauge in additional returns? First of all, the domestic, the life insurance has been quite brisk. And especially if you look at this in the long run, we may need to consider further growth and investment related to that. So that is why 60% of cash dividend has been the commitment. And aside from that, we will make the return according to the capital level. Again, investment into growth areas. We need to make investment in a disciplined manner. So at this moment, we cannot give you an idea as to what is the general level we have in mind for TSR. But again, investment will be conducted. Capital policy will be conducted in a disciplined manner. That is all.

We will move on to the next question. The next question is from Mr. Sasaki from Nomura Securities.

Yes. This is Sasaki from Nomura Securities. I have 2 questions, and I would like to ask one by one. I would like to better understand the diagram on the right-hand side of Slide 8. If you have already explained this, please forgive me for asking again. But for the amount in excess of the cash dividend, would that be used for either growth investment or share buyback? So is that why you're saying that you will promote disciplined capital policy and growth investment? So may I confirm that? And also, if possible, this fiscal year's ESR is going to be around 225%. But if you can answer this, if you reduce risk further and if you enjoy steady profit, and I believe that you will be able to generate JPY 200 billion of new business value on a consistent basis, so if you do not do anything special, I believe ESR will continue to go up. So if that is the case, looking at the diagram on Page 8, anything in excess of the cash dividend with that profit growth will be leading to this arrow that's in excess of the cash dividend.

Yes. This is Nagai, I will take that question. What you see on the right-hand side of Page 8, so the adjusted profit that is not cash dividend is expressed as growth investment and share buyback. But this does not necessarily mean that the profit will be used for these 2 purposes alone. Of course, we cannot do growth investment each year, and we will have to look at the probability of such opportunities. So we may try to prepare ourselves by putting up the internal reserves.

But is it okay to understand that part of your profit will be allocated for share buyback? So is this graph implying that message?

Well, I will not be able to say anything concrete. So I will be repeating myself: We will be looking at the capital level and also the probability of growth investment. And based on that, as for the use of the capital, each year, we will discuss and make decisions and the breakdown will be communicated accordingly to the market.

I see. So how about the 225% ESR? How should we understand this?

Yes. With the value of new business growing and cutting the risk, the capital should also increase. So this slide just shows the flow-based profit. But on a stock basis, we would also be discussing how to utilize the capital, and we will make the decision accordingly.

Just looking at your organic business, I believe ESR will be on a rising trend. Is this the right understanding?

Yes, I believe that possibility is high. But having said that, even today, we see uncertainties in the financial market, so we cannot say anything for sure and say that it will definitely go up. However, by continuing the business, the policies in-force will steadily be growing, that's in our plan. And with that, the capital level should also be steadily building up.

I see. And my second question is on Slide 6. On the right-hand side, I want to better understand this graph. Also looking at this graph, there is a gap between average assumed investment yield and the final yield on the yen-denominated bonds. But for March '24, it's a breakeven. So it does not have any positive implication to the positive spread. But if you go to the right around March 2031, the gap seems to be roughly 60 to 70 basis points. And I believe that you have a balance of JPY 7 trillion to JPY 8 trillion in yen-denominated bond. So if you multiply this spread, then that would be the rough image of how your positive spread will be increasing? And if possible, can you also mention about the hedge cost on the foreign bond because I believe it will be coming down? So considering the reduction in the hedging cost and also increase in positive spread, intuitively, I would say that the profit can be boosted by JPY 60 billion to JPY 70 billion. But what would be the impact? Can you give me some insight?

Yes. So I, Nagai, will take the question. The graph on Page 6 is just a rough image. So we cannot specifically say that the positive spread will be increasing exactly like what you see on this graph. But definitely, with whatever level payment policies, the assumed average investment yield will be coming down with the new premiums kicking in. So we expect the average assumed investment yield to go down further. And for the yen bond, with the current yield, we plan to increase our exposure. And also for the existing holdings, we will be reshuffling that position as much as possible. So the spread should be growing going forward. And also regarding the hedge cost, in our business plan, we have not incorporated a major change in the hedge cost ratio. However, by reducing the balance of the foreign bond, I believe this will have a positive implication to our profit. And as I mentioned earlier, in achieving the target for JPY 200 billion, the profit growth will be led by increasing positive spread and also steady investment on the yen bond, which should further boost the positive spread. So that will be the major pillar in our profit driver.

I see. So what you indicate on Page 6, the green line and the red line, is that reflective of specific figures or is this just an image?

Well, to a certain extent, the figures are reflected. But as for this spread, we cannot really say that this is the definite figure for sure, but this is a rough image, partially reflecting our projections.

We'd like to move on to the next question, BofA Securities, Tsujino-san, please.

I'd like to pose just one question related to goodwill of Viridium. You mentioned you would address this later, but it really depends on how you engage them. But if you look at the solvency report of Viridium, according to the numbers, rather than having the goodwill, the goodwill actually may be limited or it could be a negative goodwill. That is my take, as I was reading the report. So if you can comment on what would be the possibilities, that would be helpful?

So the fair value evaluation, especially on the liability side, we are not at the phase to answer. In terms of its magnitude and also in terms of the amortization period, once we have the number of the direction, then accordingly, we would like to disclose those information. So Allianz is taking the lead. So I believe they will be conducting this in a conservative manner. So it is not known. It's not unclear at this moment. Indeed, because in terms of the evaluation of liability, the methodology may be different from what we have in Japan. So at this time around, we would like to refrain from answering.

So if there is a huge divergence from the solvency report, I just thought it might be problematic.

So the next question is from Mr. Niwa from Citigroup.

This is Niwa from Citigroup. My question is around the shareholder return, and I have 3 questions. The first point is that you have decided on the cash dividend payout ratio of 60%. What was the discussion process that took place? I think as an option, you could have chosen something like 100%, 70% or 50%. But why did you decide on a payout ratio of 60%? And my second question is why are you using the average 5-year adjusted profit to calculate this ratio? Because I believe if you use the average of the 3-year adjusted profit, the speed of the dividend hike may have been faster. So please tell me why you are using 5 years as an average adjusted profit? And also, in your case, a big negative event like pandemic is unlikely to happen. So why did you decide on using the 5-year average? And my third question is around share count. In the final year, if I divide the EPS and the profit, the share count will be about 500 million shares. So is there an implied message regarding share buyback or treasury stocks or was it not the intention?

Yes. Thank you for your question, Mr. Niwa. This is Moriyama. Regarding the 60% payout ratio, to date, as our dividend policy, we have set roughly 50% to 60% as a criteria to be paid out from the annual profit. So that is the criteria that we use as a referential point. So I will be deviating from your question of 60% payout. But as the unique nature of the business, we are increasing the value of the in-force policies, which will translate into future profit. Also, we wanted to show that we have the future profit that can be returned. And we decided that we'd like to return more than majority of that, and that's why we set 60% as our target. And as for using 5 years to calculate the average profit level, this is used for stability reasons. And because in the fiscal year ended March '21, Taiyo Life ceded out the annuity block and the profit came down significantly. So considering the volatility of the profit base, we decided that if we use a 5-year average profit base, then we will be able to steadily pay out the dividend. So based on that discussion, we have decided on this payout ratio target. And regarding the share count, this is a minimum level that we will be aiming for. So we use the current share count to calculate this. So going forward, as we execute share buybacks, the share count can come down further. [Statements in English on this transcript were spoken by an interpreter present on the live call.]